Tracking Amazon’s Cloud Profits to the Source

Amazon.com disclosed Thursday that its cloud computing unit is both bigger in revenue terms and a more important profit contributor to the retail giant than many analysts expected. But the figures also show the unit’s profit margin is declining, highlighting questions about which part of the cloud business is driving most of the growth at the unit.

AWS brought in $1.6 billion in revenue in the first quarter, up 49 percent from a year earlier, Amazon reported, as it broke out the unit’s financial performance from its overall numbers for the first time. AWS, perhaps more surprisingly, generated operating income of $265 million, or 29 percent of Amazon’s total, up from $245 million a year earlier. Many analysts on Wall Street and in the cloud industry had believed AWS was losing money as it grew, while the revenue estimate was at the upper end of analyst projections.

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Microsoft and IBM believe the real value in cloud will accumulate in services and higher-level applications rather than the commodity business of renting out servers. Until we have better visibility into the cloudy economics of AWS, it’ll be tough to know whether they’re right.